Interest rates in a deflationary currency

[Adrian-x]

Maybe local currencies are a way to decentralize (policy) control?
(sorry, I went off on a tangent there)

I don't come to the same conclusion, Cypress by joining the EU and the Euro, is not being controlled but is being freed to interact in trade according to common laws.

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

[1714223433]

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[1714223433]

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[xxjs]

Great thread. Thanks.

[aaaxn]

No forbidding necessary we just need to use the same language to ensure we all understand each other.  

Your definition of credit (involving IOU's) is the bases for the system we have today, and it requires unsustainable growth.

Credit also involves the matter of moral principle, and an honest understanding of who can create real credit.
Only the producers in an economy are the ones who create goods and services, and as a result they take the risk by producing (hopefully something other want) and can risk again when lending to others hoping to be repaid with something they want.

Regress to a prehistoric agricultural society, to understand the principle: the producer of the wheat, can create credit by lending the wheat, but if the producer promises to lend the wheat he intends to grow, he has not created credit, but a debt.

As long as credit is created from goods and services that have been produced (or saved), it is honest, and real credit, provided it is given at the discretion of the producer / owner.  But when credit is artificially created, it is a debt, and will ripple through an economy as boom and bust as the system re-balances.

I think you are making artificial distinctions. If you lend $100 to your friend John you hold his IOU where he promises to return $110 in a year (or $101 in month, or any day on your notice, depends on contract) . John is free to do anything he want with borrowed money. If John is credible you can use his written promise to pay for goods from your other friend Bob. Congratulations you have just increased money supply, because you made transaction with money you don't yet have. It is basis of all credit creation and it does not depend on what John does for living. Substitute John with bank and you have how banking system works.

Bitcoin functions on the premise that Bitcoin credit will be created from Bitcoin's already saved, and as a result should only flow at the discretion of the saver.

This is wishful thinking. Bitcoin does not have power to do so.

[molecular]

Maybe local currencies are a way to decentralize (policy) control?
(sorry, I went off on a tangent there)

I don't come to the same conclusion, Cypress by joining the EU and the Euro, is not being controlled but is being freed to interact in trade according to common laws.

I didn't come to that conclusion, I merely wanted to discuss this objection against a global hard money because I'm unclear how this argument really works so I cannot answer adequately to it, which I would very much like to be able to do. So I was kind-of playing devils advocate in arguing for local currencies.

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.
Sideonote: The opposite happened with greece: People (institutions mainly) invested in greek bonds, greece failed, european taxpayer bailed them out. Taxpayer insures creditor. Not the way it should be.

Of course there are some problems with this (letting banks fail), namely that people are generally mislead to believe that when they put money into a bank account they still own it (not the case, they borrow the money to the bank and the bank owes them money) and that this deposit is somehow insured (by who? to what extent? obvously it's not really insured as could be witnessed).

Another problem is that it wont work globally because then the whole financial sector fails (as it should) and that's not something the powers that be want to see because then all their funny money power would vanish due to the debt collapse. They'd rather see ww3, a reduction of the population and a scape-goat to blame for the consequences of all the crimes they commited.

(I don't know why, but this thread makes me rant a lot. Dont know wether that's productive)

[aaaxn]

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.

I was always wondering why all this ranting about what happened in Cyprus among sound money advocates. What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

[NewLiberty]

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.

I was always wondering why all this ranting about what happened in Cyprus among sound money advocates. What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

The Cyprus issue includes not just what happened, but what was considered and expected for future.
The "bail-in" proposal of deposit tax exchanged for shares of failing banks presents a future model.
Wipe out lenders/bondholders and dilute shareholders by hitting the deposits to cover losses and secured debt and issuing essentially worthless shares to compensate for the deposits seized, and let it keep functioning.  If the bank manages to pull out after that, those shares may someday be worth something, but that would be largely unexpected.

[User705]

The only growth your seeing in the BTC economy is the growth in demand to speculate.  Actual goods and services transacted in BTC are flat or barely rising, and even that is mostly commerce that would otherwise have occurred in USD even without BTC existing.

My suspicion is that miners are hoarding most coins right now because they can cover their energy costs selling just a few.  We will see difficulty increase until it becomes self limiting and once all miners are forced to liquidate to pay for electric costs the price will crash as their is no way that people will put a half million dollars a day into buying newly minted BTC, the amount necessary to sustain the current price.

I think a bigger reason for continuing reduction in exchange rate is the fact that miners are currently transferring btc (wealth) to chip makers in a futile attempt to maintain hash rates and those manufacturers are converting those btc into fiat because it's not like the avg Chinese factory worker wants to get paid in btc.  This trend will continue for a while since true asic chip cost is very cheap vs current high exchange rate.  But irregardless of that short term issue all fiat is currently in a race to the bottom anyways so btc future will be fine.  Also nothing wrong with a deflationary currency.  During the entire human existence gold/silver was deflationary vs the entire human population growth rate with maybe a few short term exceptions (bubonic plague, new world ore discoveries) and yet it's still managed to be used as a store of wealth to this day.

[Adrian-x]

What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

I'd agree, it is one of 2 options, I would go further and say when I have invested in something and it has gone bankrupt or delisted, I just lose my money, and so it should be for the lenders who miscalculated and lent to those states.

[NewLiberty]

What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

I'd agree, it is one of 2 options, I would go further and say when I have invested in something and it has gone bankrupt or delisted, I just lose my money, and so it should be for the lenders who miscalculated and lent to those states.

The new piece is that not just lenders take the loss, but also depositors, who are converted to shareholders in the failing bank.

[aaaxn]

The new piece is that not just lenders take the loss, but also depositors, who are converted to shareholders in the failing bank.

If you put money to bank you are no longer its owner. You just have bank liability. If bank goes bankrupt you don't get your money (unless you are insured).
There are some distinction between bond holders and depositors but only regarding payout priority. If bank looses enough money (or all) no one gets anything.

[Adrian-x]

I think this is where you and I part ways, I don't see when and how and from what as an artificial distinctions, I see the when and how  and from what credit is created as fundamental to prosperity in the economy.  As I illustrated your definition of credit is dept based, and is controlled by trust - and human preference (and today somewhat by economists and central bankers) - where it shouldn't be fallible to the will of the controller/ creator, but be created by the risk taking of individual members needs in the economy. 

Quote simplified to illustrate based on hard money and to show who is at risk:"you" and "other friend Bob".

I think you are making artificial distinctions. If you lend $100 10 bushels of wheat  to your friend John you hold his IOU where he promises to return $110 11 bushels of wheat  in a year (or $101 10.1 bushels of wheat  in month, or any day on your notice, depends on contract) . John is free to do anything he want with borrowed moneybushels of wheat. If John is credible you can use his written promise to pay for goods from your other friend Bob. Congratulations you have just increased money supply, because you made transaction with money you don't yet have. It is basis of all credit creation and it does not depend on what John does for living. Substitute John with bank and you have how banking system works.

I agree with how credit is created, but disagree why it should be, and by inflating the money supply it is but steeling by another name (via the Cantillon Effect). Make it legal and Congratulations you have guaranteed wealth and no liability.

John's ability to repay is dependent on the unpredictable future, the result is John is actually taking the risk, not you or Bob. John now has at his disposal the ability to Malinvest, (simple example - not foreseeing a drought), he will not be able to get the wheat to repay, however he is absolved on the risk and the risk falls to you and Bob. 
   

Bitcoin functions on the premise that Bitcoin credit will be created from Bitcoin's already saved, and as a result should only flow at the discretion of the saver.

This is wishful thinking. Bitcoin does not have power to do so.

I don't understand your position, the power to do so, exist inherent in the protocol, by exposing the risk to the lender.  Let me explain, if you are lending your Bitcoin you are not lending an IOU to lend Bitcoin, you are risking your own Bitcoin. I would be more comfortable just giving an IOU or credit to the borrower like the banks do today and if he can't repay, it is just a bad debt not at my expense. 

Let me illustrate by modifying you quote below.

If you put money Bitcoin into a bank you are no longer its owner. You just have bank liability. If bank goes bankrupt you don't get your money Bitcoin.

Now that the risk has been exposed, why would anyone invest Bitcoin in a Bank when it's purchasing power is increasing (economic growth = Price deflation)
The result, the viability of credit is based on the ability to get repaid and earn interest, this post dose the basic job of illustrating how this function is a by-product of a free economy: https://bitcointalk.org/index.php?topic=222845.msg2476856#msg2476856 both saving and lending (credit creation) is reworded according to the needs of the economy. Not the ability of the bank to create credit.

[molecular]

What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

I'd agree, it is one of 2 options, I would go further and say when I have invested in something and it has gone bankrupt or delisted, I just lose my money, and so it should be for the lenders who miscalculated and lent to those states.

The new piece is that not just lenders take the loss, but also depositors, who are converted to shareholders in the failing bank.

the difference between depositor and shareholder is largely that depositor has no vote.

[molecular]

Let's look at the argument again how I see it: the idea is that a nation or economic are (which has its own currency) can devalue their currency in order to increase outside demand of their goods (these good will be cheaper for outsiders to be bought) and services (tourists can consume services within the country for cheaper than before). The argument implies this is a good thing because that country can help its economy in this way.

Is this a valid argument?

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?

They gave up the ability to steel from the people by printing money, and as they did not take fiscal responsibility for there spending, someone had to define another viable solution for them.

Like "ok, then you have to sell your gold to the IMF"?

Yes, it's true and I think it's basically the only sensible way to go. People invested in banks, banks failed, people lost money. The way it should be.

I was always wondering why all this ranting about what happened in Cyprus among sound money advocates. What happened in there is exactly what should happen in sound money system. People lent bank money and bank went bankrupt so lenders lost their money.

What ranting of sound money advocates? I think that wasn't ranting, that was advertising: "had you used sound money to save instead of bank deposit (aka investment in bank) you would now be better off".

[molecular]

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?

Sorry to quote myself and fly off on a tangent, but: fuck wage negotiations anyways. People should just either get a new job every year (or month/week) or have their own profitable businesses.

[Adrian-x]

@ molecular - all good points,

It is pretty valid argument. Lot of prices in economy are sticky. You can't easily reduce wages or retirement entitlements. It is more efficient to inflate them away.

re aaaxn point about he is correct, that is why we have problems today.

What I have learned from this exercise is that sticky prises are in fact subject to human preference and fall out of the science of economics and into the realm of the social science of economics.

[aaaxn]

I think this is where you and I part ways, I don't see when and how and from what as an artificial distinctions, I see the when and how  and from what credit is created as fundamental to prosperity in the economy.  As I illustrated your definition of credit is dept based, and is controlled by trust - and human preference (and today somewhat by economists and central bankers) - where it shouldn't be fallible to the will of the controller/ creator, but be created by the risk taking of individual members needs in the economy. 

But in my example it was created by risk taking of private individuals? 

Quote simplified to illustrate based on hard money and to show who is at risk:"you" and "other friend Bob".

I think you are making artificial distinctions. If you lend $100 10 bushels of wheat  to your friend John you hold his IOU where he promises to return $110 11 bushels of wheat  in a year (or $101 10.1 bushels of wheat  in month, or any day on your notice, depends on contract) . John is free to do anything he want with borrowed moneybushels of wheat. If John is credible you can use his written promise to pay for goods from your other friend Bob. Congratulations you have just increased money supply, because you made transaction with money you don't yet have. It is basis of all credit creation and it does not depend on what John does for living. Substitute John with bank and you have how banking system works.

I agree with how credit is created, but disagree why it should be, and by inflating the money supply it is but steeling by another name (via the Cantillon Effect). Make it legal and Congratulations you have guaranteed wealth and no liability.

You may disagree, but this is the way it is. How you are supposed to stop it? Prohibit lending? And it is not stealing. Like any other commodity you have right to your property but you don;t have right to it's value. You don't loose money because some other people starts using money substitutes. You just loose it's purchasing power. It's ok. It is same as you hold your gold/car/home you have right to it, but if other people actions affects it's price you wasn't robbed.

John's ability to repay is dependent on the unpredictable future, the result is John is actually taking the risk, not you or Bob. John now has at his disposal the ability to Malinvest, (simple example - not foreseeing a drought), he will not be able to get the wheat to repay, however he is absolved on the risk and the risk falls to you and Bob. 

And this risk should fall on me and Bob, because I lent money and accepted risk of potential default. Bob accepted it too when he made transaction with me.

   

Bitcoin functions on the premise that Bitcoin credit will be created from Bitcoin's already saved, and as a result should only flow at the discretion of the saver.

This is wishful thinking. Bitcoin does not have power to do so.

I don't understand your position, the power to do so, exist inherent in the protocol, by exposing the risk to the lender.  Let me explain, if you are lending your Bitcoin you are not lending an IOU to lend Bitcoin, you are risking your own Bitcoin. I would be more comfortable just giving an IOU or credit to the borrower like the banks do today and if he can't repay, it is just a bad debt not at my expense. 

Take example of mtgox. There was mtgox codes back then and was traded for same price as bitcoin and in fact it was only mtgox IOU. When you make deposit to mtgox you no longer have bitcoins but only mtgox promise to repay. Nothing stops mtgox from creating new account contract which allows lending of deposited bitcoins. If user accepts it it will work as good as any normal bank.

 
Let me illustrate by modifying you quote below.

If you put money Bitcoin into a bank you are no longer its owner. You just have bank liability. If bank goes bankrupt you don't get your money Bitcoin.

Now that the risk has been exposed, why would anyone invest Bitcoin in a Bank when it's purchasing power is increasing (economic growth = Price deflation)
The result, the viability of credit is based on the ability to get repaid and earn interest, this post dose the basic job of illustrating how this function is a by-product of a free economy: https://bitcointalk.org/index.php?topic=222845.msg2476856#msg2476856 both saving and lending (credit creation) is reworded according to the needs of the economy. Not the ability of the bank to create credit.

One would invest in bank to get interest on top of this appreciation.

[aaaxn]

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?

Workers and retirement are already screwed. So either you get straight retirement default and workers fired or adjust it more efficiently through exchange rate of domestic currency.

[Adrian-x]

One would invest in bank to get interest on top of this appreciation.

Go for it, lend you Bitcoin's while they are hyper deflating, I'll save my own Bitcoin's and be my own bank, each to their own.

When you see this you Know Bitcoin is something to be loved, it will make bankers honest, or better illuminate banking fraud.

[Adrian-x]

so the purpose of local currencies is to more easily and sneakily be able to screw over workers and retirement savers?

Workers and retirement are already screwed. So either you get straight retirement default and workers fired or adjust it more efficiently through exchange rate of domestic currency.

No kidding workers are being screwed, this is a mess and solving it, something has to give.  
Penalising savers through inflation (adjusting exchange rate) flies in the face of what has allowed humans to flourish,  i.e. Penalising the savers of recourses (Differed consumption of others debt in the case of fiat) for unforeseen events.

I am not convinced with " adjust it more efficiently through exchange rate of domestic currency" (ie. The invisible thief) is the most efficient option.

The net result of inflation is investing in future risk taking to maintain value. That investment = Economic growth, or stagnant growth and accelerated consumption. The net result is malinvestment.
I suspect we'd be better off taking the hit hard now and reinvesting finite recourses after the economic corection as opposed to business as usual and malinvestmenting the recourses compromising the future.  

[aaaxn]

One would invest in bank to get interest on top of this appreciation.

Go for it, lend you Bitcoin's while they are hyper deflating, I'll save my own Bitcoin's and be my own bank, each to their own.

When you see this you Know Bitcoin is something to be loved, it will make bankers honest, or better illuminate banking fraud.

Well I did lend some bitcoins on coinlenders. Are they fraudsters? Or am I?